A disagreement in Europe: The euro crisis was not a government-debt crisis

THE euro-zone crisis has transitioned from an acute phase to a chronic one. At just this moment the fear that market panic might force one or several economies out of the single currency is low. Yet few analysts believe the euro zone has solved its fundamental problems. In a piece published at Vox EU last week, a cadre of prominent economists made the very sensible point that unless euro-area leaders can agree on the fundamental causes of the crisis, they will struggle to craft long-run fixes. The authors set out their view of the crisis, in hopes that it will prove a foundation for consensus building.Their explanation, which strikes me as the right one, is that the euro-area crisis was not a sovereign-debt crisis. If it had been, one would have expected Belgium and Italy, which entered the crisis with extraordinarily high debts, to have landed in serious trouble. As it turned out, they made it through without troika programmes, while Ireland and Spain, which entered the crisis with low levels of sovereign debt, needed bail-outs. The problem, instead, was one of massive capital flows across borders, which encouraged high levels of private borrowing in the economies that eventually got into trouble. When the global financial crisis generated a reversal in those flows, private borrowers and banks got into big trouble. That trouble translated into serious economic downturns …